Don't Believe This Market Move Is Driven By A Short Squeeze Or That We Will See A Sustainable Rally
I might as well chime in as everyone else has about this two day rally and a common opinion that it was driven by a short squeeze. Obviously markets don't go to zero in a month but in this case, banks came pretty close. Has anyone ever seen such enthusiasm for a two day rally? Two days folks! That's it. Now we have every Tom, Dick and Harry on Wall Street and Barron's writing to buy banks. In addition, this supposition of a short squeeze also has no scientific merit at this point.
Let's take a different view than what is being reported in the media and by almost all of Wall Street that banks have bottomed and/or we are headed for a tradable rally.
The reality is this move likely has less to do with a short squeeze than options expiration and the market pulling the premium out of bearish options positions on banks. We have mentioned this before as a a counter-trend move that is common during options expiration week. Especially in a fast moving market. In this case bears load up with puts (most options expire worthless) in the heat of a decline and options writers have every reason under the sun to take that money back with a counter-trend move before expiration. Additionally, the SEC announcement that shorting primary dealers should actually be done legally also is probably playing a role in strength within these particular shares. ie, Given the massive volume, as an example, in the XLF, many of the short positions were assuredly initiated without access to the underlying shares or when settlement came the shares weren't there. (It could have also caused those skirting this rule to cover shorts in other banking stocks as well. No one is foolish enough to taunt the SEC.) Then there is psychology at play. As I wrote on here a handful of days ago, the demarcation line of shorting primary dealers was drawn in the sand and that government stance could very well have been interpreted as a position that the Fed will not allow any primary dealers to fail. It follow that a line of thinking with many value investors that there is minimal risk owning these companies after they have fallen 70, 80 or 90%.
Now onto this short squeeze issue. A short squeeze assumes there are substantial buyers willing to bid the market. There is no proof of any such position at this time. The debt markets are still roiling and anyone with half a brain is watching that fact before investing large positions in banks. Additionally, if one looks at how the market leaders including energy, technology and commodities are now falling, that does not portend well for an argument that buyers re-entering the markets and squeezing shorts.
Here is more likely a closer reality. Almost every Wall Street professional within shouting distance of a microphone has said they have covered their short positions. Wall Street being so synchronized is a contributor to this mess so I don't see any such potential "group think" as generally bullish. In other words, they were all being foolish on the way up, why would it be any different on the way down? If one firm covers, you can be assured that information is going to be passed through the hallways of every firm if for no other reason than an attempt for everyone to make money. Such a broad action of short covering would explain the large bid placed under financials as opposed to any significant buyers being the root cause.
The short covering was likely also fueled by many anecdotal data points that selling was getting really extreme by those who believe God grants rallies just because he is gracious. Many of the data points I've seen mentioned include oversold price momentum oscillators such as MACD, over 1,000 new stock lows on the NYSE, bearish sentiment surveys, a pickup in volume on the last down day and a host of other data points used by many knife catchers to anticipate a tradable bottom. If you are in front of a terminal all day long, initiating a speculative long position when the market sees over 1,000 new lows might be a decent day or two trade. If you are an investor, it's not that easy. As I wrote before, using technical data from the last bear market or bull market is fraught with risk due to changing fundamentals. Trading is a game for professionals. And, even at that, most professionals learn the hard way and trade way too often. The tortoise wins the investing game. There is plenty of time to be a hero.
Another point one needs to think about is that banks have literally crashed. Many of these stocks are at twenty or thirty year lows or all time lows since coming public. There is surely a certain profile of investor looking for an entry point at these prices. That could be based on nothing more than they dropped alot so I'm buying.
Many risks are still not being acknowledged by Wall Street prognosticators so there is no reason to believe these risks have been discounted in the shares of banks. Remember, no one with access to a microphone on Wall Street was alerting anyone to the major risks in banks two or three years ago. And, I do mean no one. Even those that have been right since this crisis hit were eating all of the dog food their bretheren could dish out. There were surely many smart people who knew there were risks but they weren't mainstream Wall Street types posing for glamour shots on CNBC. So, to believe that they now fully grasp a situation that they didn't see coming is hardly believable. In fact, it's more appropriately laughable.
So, the banking short trade might lose momentum for a while but buying here is pure gambling. That also means many buyers here are also likely poor long term accumulators of capital. We are seeing many false prophets issuing so many buy and sell recommendations on sectors and stocks over the last year that it makes my head spin. Buy this month. Sell next month. Many of these people were minting money in the 1990s when even monkeys with dart boards could get double digit returns. Ironically, what we are finding out now is that, indeed, many are monkeys. I wonder how much Warren Buffett wagers at the track? Wanna bet nary a single nickel? And, I can assure you the greatest investor of all time, Ben Graham, would not be buying this current version of Russian roulette because he couldn't do an accurate analysis on any of these companies.
The point to this post is markets move in mysterious ways. Much of that mystery is due to lack of understanding. And, no single person understands all of the forces working in markets where millions of participants are involved so the mystery will always remain. But, weeks ahead will be telling as to whether large buyers will actually step in to save this market or whether this is an explainable reaction to explainable events that have absolutely nothing to do with investor enthusiasm to re-enter this market.
Let's take a different view than what is being reported in the media and by almost all of Wall Street that banks have bottomed and/or we are headed for a tradable rally.
The reality is this move likely has less to do with a short squeeze than options expiration and the market pulling the premium out of bearish options positions on banks. We have mentioned this before as a a counter-trend move that is common during options expiration week. Especially in a fast moving market. In this case bears load up with puts (most options expire worthless) in the heat of a decline and options writers have every reason under the sun to take that money back with a counter-trend move before expiration. Additionally, the SEC announcement that shorting primary dealers should actually be done legally also is probably playing a role in strength within these particular shares. ie, Given the massive volume, as an example, in the XLF, many of the short positions were assuredly initiated without access to the underlying shares or when settlement came the shares weren't there. (It could have also caused those skirting this rule to cover shorts in other banking stocks as well. No one is foolish enough to taunt the SEC.) Then there is psychology at play. As I wrote on here a handful of days ago, the demarcation line of shorting primary dealers was drawn in the sand and that government stance could very well have been interpreted as a position that the Fed will not allow any primary dealers to fail. It follow that a line of thinking with many value investors that there is minimal risk owning these companies after they have fallen 70, 80 or 90%.
Now onto this short squeeze issue. A short squeeze assumes there are substantial buyers willing to bid the market. There is no proof of any such position at this time. The debt markets are still roiling and anyone with half a brain is watching that fact before investing large positions in banks. Additionally, if one looks at how the market leaders including energy, technology and commodities are now falling, that does not portend well for an argument that buyers re-entering the markets and squeezing shorts.
Here is more likely a closer reality. Almost every Wall Street professional within shouting distance of a microphone has said they have covered their short positions. Wall Street being so synchronized is a contributor to this mess so I don't see any such potential "group think" as generally bullish. In other words, they were all being foolish on the way up, why would it be any different on the way down? If one firm covers, you can be assured that information is going to be passed through the hallways of every firm if for no other reason than an attempt for everyone to make money. Such a broad action of short covering would explain the large bid placed under financials as opposed to any significant buyers being the root cause.
The short covering was likely also fueled by many anecdotal data points that selling was getting really extreme by those who believe God grants rallies just because he is gracious. Many of the data points I've seen mentioned include oversold price momentum oscillators such as MACD, over 1,000 new stock lows on the NYSE, bearish sentiment surveys, a pickup in volume on the last down day and a host of other data points used by many knife catchers to anticipate a tradable bottom. If you are in front of a terminal all day long, initiating a speculative long position when the market sees over 1,000 new lows might be a decent day or two trade. If you are an investor, it's not that easy. As I wrote before, using technical data from the last bear market or bull market is fraught with risk due to changing fundamentals. Trading is a game for professionals. And, even at that, most professionals learn the hard way and trade way too often. The tortoise wins the investing game. There is plenty of time to be a hero.
Another point one needs to think about is that banks have literally crashed. Many of these stocks are at twenty or thirty year lows or all time lows since coming public. There is surely a certain profile of investor looking for an entry point at these prices. That could be based on nothing more than they dropped alot so I'm buying.
Many risks are still not being acknowledged by Wall Street prognosticators so there is no reason to believe these risks have been discounted in the shares of banks. Remember, no one with access to a microphone on Wall Street was alerting anyone to the major risks in banks two or three years ago. And, I do mean no one. Even those that have been right since this crisis hit were eating all of the dog food their bretheren could dish out. There were surely many smart people who knew there were risks but they weren't mainstream Wall Street types posing for glamour shots on CNBC. So, to believe that they now fully grasp a situation that they didn't see coming is hardly believable. In fact, it's more appropriately laughable.
So, the banking short trade might lose momentum for a while but buying here is pure gambling. That also means many buyers here are also likely poor long term accumulators of capital. We are seeing many false prophets issuing so many buy and sell recommendations on sectors and stocks over the last year that it makes my head spin. Buy this month. Sell next month. Many of these people were minting money in the 1990s when even monkeys with dart boards could get double digit returns. Ironically, what we are finding out now is that, indeed, many are monkeys. I wonder how much Warren Buffett wagers at the track? Wanna bet nary a single nickel? And, I can assure you the greatest investor of all time, Ben Graham, would not be buying this current version of Russian roulette because he couldn't do an accurate analysis on any of these companies.
The point to this post is markets move in mysterious ways. Much of that mystery is due to lack of understanding. And, no single person understands all of the forces working in markets where millions of participants are involved so the mystery will always remain. But, weeks ahead will be telling as to whether large buyers will actually step in to save this market or whether this is an explainable reaction to explainable events that have absolutely nothing to do with investor enthusiasm to re-enter this market.
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